We recently met with management and note that Globe faces headwinds in its light-sensor business. Although its end customer’s products are seeing weaker demand, lower volumes in 1Q19 are looking seasonal, similar to last year’s drop. We were, however, surprised by the softer timing-device business although bottom-line impact should be small. The automotive laser headlight is shaping up and should help offset some of the slack in the former. At 20% EPS growth, c. 6% yield, strong ROE and below mean PE multiples for 2019E, we reaffirm our BUY call.

Weaker Light-sensor Volumes, But Gesture Volumes Looking Strong

We now assume Globe’s light sensor volumes (c. 60% of sensor production) fell low double digits mom in January after a similar mom drop in December 2018, due to soft demand for its end customer’s products. We assume the weak trend continues to 18-19m units in March 2019. The Gesture sensor, which is designed into a wireless headset, has however seen stable volume at 15-16m units per month since mid-2018. Overall, this potentially implies a 28% qoq and 7% yoy contraction in 1Q19 sensor production volumes. Production volumes in 4Q18 averaged 52m units/month, flat qoq. This suggests that 4Q18 results, due on 25 February, should be relatively flat qoq, against our previous estimates of sequential growth. On the whole, we revise down our 2019E sensor volumes by 11%, but leave those for 2020E unchanged.

Lower Timing Device Volumes, But No Significant Impact to Bottom Line

The timing devices business which we assume accounts for 29% of 2018E revenue is set to decline in 2019E as volumes have shrunk by up to a third (average of 120m units/month in 2018E). These products should be gradually returned to Epson till 1Q19 although we think that longer term this business may not be sustainable. For now, the less profitable products have been cut, potentially enhancing near-term margins. Also, the move will likely aid Globe in addressing its labour shortage issues, given the nature of this business.

Reaffirm BUY Call With a Lower Target Price of RM2.55

Overall, we cut our 2018-20E EPS by 10-16% and 12-month TP to RM2.55 (from RM3.0), based on an unchanged 2019E PER of 20x. Despite the revisions, we still expect Globe to register earnings growth of 20% in 2019E, after a 35% jump in 2018E. Well managed and focused in the sensor business with potential upside from its automotive laser headlamp business, we reaffirm our BUY call on Globe, a country top pick. Downside risks: weak demand for its customers’ products, customer loss and sharp appreciation of the RM.

Source: Affin Hwang Research - 8 Feb 2019